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Abstract

The economic theory of regulation posits that regulation is a service offered by self-regarding government officials to well-organized interests at the expense of the general public. Airline regulation has often been cited as a classic example, in which a naturally competitive industry was subjected to price and entry regulation, raising fares and suppressing service to the benefit of firms, labor unions, and suppliers at the expense of the traveling public. The history of its genesis is consistent with this view, since the major firms in the industry themselves benefited from informal government intervention and then lobbied for the regulatory framework enacted in 1938. But price and entry protection was lifted in 1978 as the result of a legislative process that the industry bitterly opposed, and twenty-five years of competition has damaged the interests of airlines, labor unions, and suppliers while greatly benefiting the unorganized traveling public. Why didn't the industry and its suppliers and labor unions lobby for and receive protection once the impact of deregulation on organized interests became clear? Does its failure to do so undermine the economic theory of regulation? The explanation appears to lie in the fact that comprehensive regulation tended to make firms alike and align their political interests, and deregulation allowed many different players and strategies to emerge, benefiting some and harming others. Accordingly, the industry was unable to achieve the level of cohesion necessary to undo a popular legislative program.